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IPOs outperform, deliver buoyant returns

Over the year to 31 July, the average return from the 43 companies which had listed on the ASX was 26.2 per cent, compared to a return of just 5.0 per cent from the S&P/ASX 200.

The Australian initial public offerings (IPOs) market delivered strong gains in July, with the average return of the companies listing on the ASX striking 15.7 per cent over the month, outperforming the S&P/ASX 200 by 9.4 per cent, according to a new report, the OnMarket July IPO Report 2016.

The report reveals that IPOs are by far the best-performing sector in the share market this year.

Over the year to 31 July, the average return from the 43 companies which had listed on the ASX was 26.2 per cent, compared to a return of just 5.0 per cent from the S&P/ASX 200.

Moreover, indicating a very healthy IPO market, both the returns and the number of companies listing were higher compared to the same period in 2015, as the table below shows.

Big gains were also posted by jeweller Michael Hill (ASX: MHJ), which raised $440.6 million in the month's biggest float, returning 8.7 per cent to investors on its first day of trading and 28.7 per cent since a July 7 listing.

The month featured a private equity float, the IPO of finance company Scottish Pacific (ASX: SCO) by Next Capital, which gained 7.8 per cent after a 13 July listing.

While not every IPO goes up on day one (for instance, Kogan dropped 16.7 per cent on the first day), there are at least two elements of a new float's pricing that are positive.

One, in order to attract investors, the vendors and their agents have to make sure the offering is priced at a level where informed investors will see more upside than downside.

And two, listing shares means they become liquid, going from being untradeable to tradeable. That inevitably makes them more attractive to investors and can push up their value.

Other factors? It could be there's a turbo effect on the upside insofar as investors are chasing new floats because previous ones have gone well.

Moreover, contrary to recent criticisms that many companies coming to the market are not developed enough to withstand the listing process, the current crop of IPOs are tending to list at a premium and then rise from there, as highlighted by the fact that the month-end gain of 15.7 per cent on all July IPOs built on the average first day return of 11.9 per cent.

So what are the chances of getting ahead?

If you have a broad exposure to IPOs, the chances are good. Of the 21 companies that came onto the ASX boards in the second quarter of 2016, only six ended the quarter below their issue price.

In July, of the nine companies that listed, only one ended that month lower. These are very good odds.

While no-one can see the future, there is a definite trend that IPOs, often being smaller and more nimble companies with well-defined business plans, can deliver the goods to investors.

The IPO process is rigorous and companies are listing with their books and management in order--and investors are benefitting from that.

Currently, 13 IPOs are proposed that will raise more than $173.1 million over the next two months.